Nine Dragons Paper stock rating upgraded by Citi on pulp cost savings

Citi upgraded Nine Dragons Paper (HK:2689) to Buy from Neutral, raising its price target to HK$6.20, driven by anticipated significant pulp cost savings from new internal production facilities. The investment bank projects a 58% year-over-year surge in 2HFY25 core attributable profit and has raised FY25-27 earnings estimates by 36-58%, initiating a 30-day positive Catalyst Watch ahead of an expected August profit alert. Citi notes the stock remains 'cheap' at approximately 0.4x price-to-book and 7x FY26E price-to-earnings, with a potential total return exceeding 55%.

Analysis

Citigroup has upgraded Nine Dragons Paper (HK:2689) from Neutral to Buy, substantially increasing its price target to HK$6.20 from HK$3.60. The core of this bullish thesis rests on significant, anticipated margin expansion driven by cost savings from new internal pulp production facilities at its Beihai and Hubei mills, rather than top-line growth, as revenue is forecast to remain flat. Citi projects this operational improvement will cause core attributable profit to surge 58% year-over-year to Rmb811 million in the second half of fiscal year 2025 and has consequently raised its FY25-27 earnings estimates by 36-58%. Underscoring this conviction, the bank has initiated a 30-day positive Catalyst Watch on the stock, expecting a positive profit alert from the company in August. The valuation is viewed as a key part of the appeal, with Citi noting the stock appears 'cheap' at approximately 0.4x price-to-book and 7x price-to-earnings for FY26E, implying a potential total return of over 55%.

Key Decisions for Investors

• Investors should assess Nine Dragons Paper primarily on its ability to execute on margin expansion through its new internal pulp facilities, as this is the central pillar of the bull case, with revenue growth not being a key factor.
• The expected positive profit alert in August represents a significant near-term catalyst; positions could be considered in anticipation of this event, which Citi has highlighted with a 30-day Catalyst Watch.
• Given the stock is trading at a low valuation of approximately 0.4x price-to-book, investors may find an attractive entry point, though the realization of the greater than 55% potential return is contingent on the successful ramp-up of the new pulp production.